“There’s an old saying in Tennessee – I know it’s in Texas, probably in Tennessee – that says, fool me once, shame on – shame on you. Fool me – you can’t get fooled again.”
I’ll go out on a limb and say that former President George W. Bush probably wasn’t thinking about Geographic Targeting Orders when he famously “improved upon” that old proverb. But after FinCEN’s recent adventures in administrative law, it feels surprisingly apropos.
On July 13th, the Ninth Circuit affirmed a preliminary injunction against FinCEN’s Southwest Border Geographic Targeting Order (GTO), which had required money services businesses in designated border communities to file Currency Transaction Reports on cash transactions exceeding just $200. In Novedades y Servicios, Inc. v. FinCEN, the court concluded that the challengers were likely to succeed on several Administrative Procedure Act (APA) claims. Most importantly, the court found the GTO was likely not really an “order” at all, but a de facto rule that should have gone through notice-and-comment rulemaking.
An important distinction, to be sure, because the GTO didn’t target particular institutions based on individualized facts. Instead, it prospectively imposed legal obligations on every covered money services business across 30 ZIP codes, rested on generalized concerns about illicit finance, and established policy applicable to an entire class of businesses. And the Ninth Circuit was unusually blunt about the significance here: the fact that a GTO applies to a “regulatory category” rather than “specific, identified businesses” is “precisely what makes it a rule.” Neither limiting that rule geographically nor giving it a 180-day expiration date changes the analysis.
The court also found that FinCEN likely acted arbitrarily and capriciously (which any lawyer will tell you is never a phrase you want to hear in a legal opinion) by failing to consider compliance costs. And the paper trail here did little to inspire confidence, to say the least.
In fact, FinCEN’s principal evidence that it had actually considered the issue was an undated, redlined draft labeled only “March XX,” with blank clearance and approval dates. When the district court asked whether it might simply have been an “after-the-fact rationalization and quick job to justify what was done,” government counsel could offer little beyond the presumption of regularity – admitting that he had no factual explanation for the “XX” and saying, in a telling moment of candor – “I don’t know what [that] means.”
Needless to say, this isn’t exactly the most ironclad legal defense, and the Ninth Circuit refused to treat the memo as a justification for the GTO.
Fast forward to August 7th – less than four weeks after Novedades – when FinCEN renewed a separate GTO aimed at government-benefits fraud in Minnesota. The order requires banks and money transmitters in Hennepin and Ramsey Counties to report additional information concerning covered international funds transfers of $3,000 or more. FinCEN had previously narrowed portions of the original order through exemptive relief, but Treasury says the renewed GTO’s reporting requirements are otherwise unchanged.
Now, to be clear, no two GTOs are built alike, and these two are hardly identical. Minnesota’s $3,000 threshold is considerably more restrained than the Border GTO’s original $200 threshold, and the Minnesota order is more specifically focused on outbound international transfers. Those distinctions just may just give FinCEN a better argument that the reporting burden is proportionate to the investigative objective (presuming, of course, FinCEN remembered to document its reasoning before issuing the order, rather than asking its lawyers to reconstruct it afterward).
It should be noted that Congress does expressly authorize GTOs for up to 180 days and permits their renewal under 31 U.S.C. § 5326(d), but that doesn’t do much to resolve the rule-versus-order problem, because as the Ninth Circuit emphasized, rules can be geographically and temporally limited too.
And even with those distinctions, there’s still the whole APA problem of it all.
Like the Border GTO, the Minnesota order doesn’t adjudicate misconduct by identified institutions. It prospectively regulates an entire category of banks and money transmitters based primarily on where they happen to operate. The geography is particularized, but the regulated parties aren’t – and according to the Ninth Circuit, it is the latter that matters. The court specifically rejected the idea that a geographically limited directive necessarily looks like an “order” where it instead imposes prospective obligations on a regulatory category of businesses.
So, said differently – take that analysis, apply it here – and things start to look awfully familiar. Congress gave Treasury separate mechanisms for imposing reporting requirements – regulations on the one hand, and § 5326 orders on the other. The Ninth Circuit specifically rejected an interpretation under which FinCEN could sidestep that distinction and impose new reporting obligations on “any category of regulated businesses in any part of the country” simply by labeling the action an “order.” Otherwise, the agency could effectively obtain rulemaking power through § 5326 without undertaking rulemaking at all.
With Minnesota, what began as a 180-day GTO in February has now simply been renewed for another 180 days, with Treasury expressly stating that (aside from previously granted exemptions) the reporting requirements remain unchanged. A supposedly temporary investigative order is therefore beginning to look markedly more like an ongoing regulatory reporting program, maintained six months at a time.
(As an aside – and as an incidental bit of irony – I’d be remiss if I didn’t mention that the Federal Register’s Official Site categorizes both the original Minnesota GTO and its renewal as a “Rule,” even though FinCEN identifies each action as an “Order.” Of course, that classification isn’t legally controlling, but FederalRegister.gov routinely categorizes actual agency orders as “Notices,” making this particular choice just a little too on-the-nose to go without comment.)
These factors, by themselves, don’t mean the Minnesota GTO is automatically unlawful. Novedades binds the Ninth Circuit, while Minnesota sits in the Eighth. Nor did the court hold that FinCEN cannot use § 5326 to impose meaningful reporting obligations.
But you simply can’t ignore the timing – FinCEN has now been explicitly warned by a federal appellate court that courts will examine the substance of agency action, not its “self-serving label,” and that § 5326 cannot become a shortcut for imposing new reporting obligations on whole categories of businesses without rulemaking. Yet only weeks later, the agency renewed another broad, prospective reporting framework governing an entire category of financial institutions, again by calling it an “order.”
So, who exactly is at risk of getting fooled again? After Novedades, a Minnesota court may eventually be asked to provide the answer.
Brett Goodnack, JD, CAMS
Compliance Advisor